U.S. authorities have settled with virtual currency firm Ripple Labs Inc. resolving allegations that it violated federal law and didn’t have adequate anti-money laundering (AML) controls.

San Francisco-based Ripple Labs and its wholly owned subsidiary XRP II LLC agreed to resolve a criminal investigation by the U.S. attorney’s office and the Internal Revenue Service (IRS) in a settlement agreement that will require it to pay US$700,000 in penalties and forfeiture; and, to undertake a series of remedial measures, including migrating part of its virtual currency business to a separate entity and enhancing its AML controls.

U.S. authorities say that the deal formalizes the steps Ripple — which is backed by several high profile venture capital firms, including Google Ventures, IDG Capital Lightspeed Venture Partners and Andreessen Horowitz — must take to bring its virtual currency operation within the existing U.S. regulatory framework for money services businesses. Earlier this year, a Ripple executive also appeared before Canada’s Standing Senate Committee on Banking Trade and Commerce, which is currently studying the development of digital currency.

U.S. authorities alleged that Ripple sold its virtual currency, known as XRP, although it had not registered with the U.S. Treasury Department Financial Crimes Enforcement Network (FinCEN), and, that it failed to establish an adequate program to combat money laundering, among other things.

“By these agreements, we demonstrate again that we will remain vigilant to ensure the security of and prevent the misuse of the financial markets,” said U.S. attorney Melinda Haag of the Northern District of California.

“Ripple Labs Inc. and its wholly-owned subsidiary both have acknowledged that digital currency providers have an obligation not only to refrain from illegal activity, but also to ensure they are not profiting by creating products that allow would-be criminals to avoid detection,” she added. “We hope that this sets an industry standard in the important new space of digital currency.”

“Virtual currency exchangers must bring products to market that comply with our anti-money laundering laws,” said FinCEN director, Jennifer Shasky Calvery. “Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.”